Why Momagri’s proposals fully respect the European Union treaties and regulations?
Momagri Editorial Board
March 14, 2017
Applying the Momagri CAP implies that budget commitments and payments are adjusted every year in line with market developments.
Indeed, its underlying regulatory principles are based on the implementation of:
- Counter-cyclical subsidies, when market prices lastingly fall below the tunnels’ floor price,
- And public stockpiling, when prices drop below the public regulation threshold.
As a result, the budget allowance of the first pillar would vary according to the conditions of the three major agricultural sectors to which the Momagri CAP is applied––grains, milk and oilseeds––notwithstanding the possibility to extend it to other sectors.
This article seeks to show that:
- The variability of annual budgets does not involve any derogation from the financial provisions of the European Union Treaty.
- In fact, it will not be necessary to transfer budget appropriations from one year to the next beyond the existing mechanisms, thus discarding any notion of “multiannual budget”.
What to keep in mind:
1. The only appropriation amount of reference which should not be exceeded is that of the multiannual financial framework (MFF).
2. Currently, the multiannual funding envelope (2014-2020) is equally divided to attain the annual budget. Yet the EU treaties do not specify that the CAP annual budget must be equivalent to one seventh of the MFF.
3. However, the budget authorities must set a credit ceiling. In the framework of multiannual prospects, nothing prevents them from imposing on a yearly basis an appropriations limit matching a crisis scenario which is beyond the annual average budget to be respected over the multiannual period.
We then proceed within the standard budget-making process:
4. The November 13, 2013 decision setting the multiannual financial framework clears the way (see Articles 5 and 6) since it specifically indicates that proposed ceilings can be exceeded (up to €10 billion in 2020) by an amount equal to the gap between the previous year’s executed payments and the ceiling.
5. That is when the mechanisms of the amending budget, appropriation carryovers and contingency funds would allow to manage the necessary budget variability, and fine-tune budget expenditures before the end of the fiscal year, thus avoiding transfers from one year to the next beyond the usual carryovers provided by Article 316 of the Treaty on the Functioning of the European Union.
6. The provisions of the Omnibus Regulation satisfy the need to ease budgetary rules and increase flexibility, particularly in crisis and emergency conditions.
I) What the legal and regulatory framework allows
1) What do the treaties say?
The legal provisions governing the formation and execution of the EU budgets are specified in Title II of the sixth part of the consolidated version of the Treaty on the Functioning of the European Union namely “Financial Provisions” (Official Journal of the EU No. 202, June 7, 2016, pages 181 to 188), which gathers the provisions regarding the functioning of the Union.
Below are the Treaties’ articles that allow determining the feasibility of the Momagri proposal:
- Article 310.1: “The revenue and expenditure shown in the budget shall be in balance.”
- Article 310. 2: “The expenditure shown in the budget shall be authorized for the annual budgetary period […]”
- Article 312.1 paragraph 1: “The multiannual financial framework shall ensure that Union expenditure develops in an orderly manner and within the limits of its own resources. It shall be established for a period of at least five years. The annual budget of the Union shall comply with the multiannual financial framework.”
- Article 312.3: “The financial framework shall determine the amounts of the annual ceilings on commitment appropriations by category of expenditure and of the annual ceiling on payment appropriations. The categories of expenditure, limited in number, shall correspond to the Union’s major sectors of activity. The financial framework shall lay down any other provisions required for the annual budgetary procedure to run smoothly.”
- Article 313: “The financial year shall run from 1 January to 31 December”.
It clearly arises from the various provisions of Article 314 that:
Lastly, Article 316 stipulates that: “In accordance with conditions to be laid down pursuant to Article 322, any appropriations, other than those relating to staff expenditure, that are unexpended at the end of the financial year may be carried forward to the next financial year only.”
- The Commission submits a draft budget to the Council and the Parliament not later than 1 September of the preceding year.
- The Council adopt its position by 1 October at the latest and forwards to the European Parliament, which has 42 days to approve and propose amendments.
- The Council and the Parliament have a maximum of 35 days to reach an agreement under a conciliation committee. This means that the budget adoption process is completed around 20 December.
- If the budget is rejected by either budget authorities (European Council and Parliament), the Commission must propose a new budget draft, and the budget execution for the coming year is made according to the provisional twelfth scheme until the budget is definitively approved.
2) What does the financial regulation of the European Parliament and the Council say pursuant to the treaties?
The regulation concerning the financial rules applicable to the general budget of the Union–– also called Omnibus––submitted by the European Commission on September 14, 2016 and currently in first reading in the European Parliament, points out that the simplification and relaxation of the EU financial rules are fundamental.
This draft regulation includes all the rules applicable to budget and financial issues.
The objective is to increase the ability of the Union budget to adjust to changing circumstances and tackle unexpected events.
As part of “a more flexible budget management”, it proposes the creation of various “reserves” that demonstrate a willingness toward budget flexibility.
In the explanatory statement of paragraph 5, “More flexible budget management”, it is noted in item 1 that “The proposal sets out several ways for more budgetary flexibility, in order to allow the Union to respond to unforeseen challenges and new tasks more effectively”.
As part of such article, it is added to “Foresee more flexibility for crisis and emergency situations and humanitarian aid in grants”.
In Article 12, “Cancellation and carry-over of appropriations” of the regulation:
Paragraph 2, “Appropriations may be carried over, but only to the following financial year, by a decision taken by 15 February...”.
Paragraph 3 a, “Amounts corresponding to commitment and payment appropriations for the Emergency Aid Reserve and for the European Union Crisis Reserve and to commitment appropriations for the European Union Solidarity Fund;”
It is stated in Article 42.1, “[...] If there are unavoidable, exceptional and unforeseen circumstances, the Commission may present draft amending budgets which are primarily expenditure-driven”.
Articles 42.2 and 42.3 specify “[...] Before presenting a draft amending budget, the Commission and the other institutions shall examine the scope for reallocation of the relevant appropriations, with particular reference to any expected under-implementation of appropriations », “the Commission shall, except in duly justified exceptional circumstances submit its draft amending budgets simultaneously to the European Parliament and the Council by 15 October at the latest of each financial year. It may attach an opinion to the requests for amending budgets from the other institutions.”
3) What does the November 13, 2013 rule on the 2014-2020 multiannual framework say?
Article 1: See Appendix. “The financial framework sets out an annual staggering of commitment and payment appropriations”.
Article 3.1: “[...] respect of annual ceilings expenditures [...]”.
Articles 5 and 6:
II) The implementation rules of the Momagri CAP
- Possibility of technical modifications, and especially “revaluation of the ceilings and of the overall figures for appropriations for payments”
- Between 2015 and 2020, upward adjustment of payment ceilings by an amount corresponding to the difference between executed payments and the payment ceiling set in the financial framework for the previous year.
- - For the years between 2018 and 2020, annual payments not exceeding the following maximal amounts compared to the initial ceiling of payments for the years:
- 2018: €7 billion
- 2019: €9 billion
- 2020: €10 billion
1) The operational framework
To implement the Momagri CAP, the budget of the first pillar of the CAP will be assessed each year for the “counter-cyclical payments and stockpiling” regarding the grain, milk and oilseed sectors.
As a result, there will be an annual variability according to market conditions, in addition to the Europe Quality Aid that will have a fixed value.
The budget adoption process for the concerned sectors will thus be based on a central expenditure scenario founded on price forecasts, a reserve fund and an amending budget.
This process is fully in line with the standard annual budget preparation procedure in the European Union.
The regulation practice will take place at two levels: Commission and Budget Authority (European Council and Parliament). The payment system will be simplified.
- The central scenario
Provided that budget discussions (see Article 314) are carried out from September 1 to late December, the budget draft might capture the impact of market developments pretty well, and thus include the appropriations concerning counter-cyclical and public stockpiling mechanisms with a reduced margin of error. This will be the central scenario.
- The annual reserve fund
It will be nevertheless necessary to anticipate a possible price deterioration while drafting the current year’s budget, and secure an annual reserve fund accordingly to meet additional appropriations needed for counter-cyclical support or public stockpiling.
For this purpose, a projection based on a sharper deterioration compared to the central scenario should be built.
- The amending budget
At mid-year, and more generally at the presentation of the draft budget for the following year, an amending budget for the current year will be submitted. It determines the reserve fund employment based on the needs arising from market price conditions.
The budget authority will then assess, with a much greater certainty, the level of budget appropriations needed for the first pillar in the current year.
This will occur with the full respect of an annual appropriations ceiling defined on the basis of a crisis scenario under the multiannual framework (see Article 312.3).
- The carryover to the following year
Given the above-mentioned expenditure adjustment in the amending budget, the potential carryover to the following year will be limited, which is not in contravention to the treaties’ provisions (Article 316).
Yet the very process of drawing up budgets, as outlined here, does not involve an appropriations carryover, since a new cycle of designing a central scenario then a reserve fund for the following year is initiated on 1 September of the current year, at the same time as the submission of the amending budget to the budget authority.
The only new constraint in applying the Momagri CAP project is that the Commission will has to develop price simulation tools which are more sophisticated than those available today.
- A two-level regulation mechanism
The floor price and the threshold of public regulation for each sector will be settled by the budget authority (European Council and Parliament). They should remain stable over time. In fact, the regulation of agricultural markets will be done at two levels:
- The European Commission will be in charge, under existing rules and based on prevailing equilibrium and floor prices, of taking any additional regulation measure regarding production and stockpiling, to counter-cyclical subsidies.
- The budget authority may take further action on an exceptional basis if the measures adopted by the Commission are not adequate to rebalance markets and stem a potential budget slippage from the multiannual prospects.
We would then be in a long-lasting crisis scenario that has never happened in the past.
Such situation would nevertheless create a large scale political shock that would certainly lead the EU to take exceptional measures.
- A simplification of the payment system
Farmers will receive the Europe Quality Aid at the beginning of the year (February – March), which will strengthen their cash flow, and at the end of the year (November – December) the entire counter-cyclical payment based on the estimated deviation of market price from the floor price.
Yet the amending budget can be submitted until 15 October, a time when one should have clear insight of the current year’s price evolution.
Therefore, the difference between budget appropriations enshrined in the amending budget and payments to farmers will be small, which fully justifies the reduction, even absence, of the carryover to the following year.
- The respect of multiannual financial outlook
A crisis reserve for the CAP amounting to 3% of the multiannual package will be established within this envelope.
The annual spending limit as required by the treaties and specified in the financial framework regulation will be fixed, for ease of reference, at 97% of the multiannual allocation.
Each year, the difference between the payment appropriations effectively spent and the annual indicative ceiling will be assessed.
The average level of budget execution will be calculated on a rolling average basis compared to the annual reference ceiling.
To this end, an estimate will be drawn up based on a sharper deterioration simulation compared to the central scenario.
If the cumulative deviation of the current year exceeds an amount set by the budget authority, the crisis reserve can be activated. Inversely, if the cumulative deviation is lower than the amount set by the budget authority, the crisis reserve may be funded.
The corresponding mechanisms will directly derive from the prescribed measures already adopted in December 2013 (Articles 5 and 6).
There would thus be continuity with respect to the treaty, the financial regulation and the specific measures of the multiannual financial framework.